Bets on ZROZ, employment data smack of Wall Street inside job

If you had known about the numbers that the Bureau of Labor Statistics was releasing Friday about employment, and wanted to bet on your information, there would have been no better place to turn than the PIMCO 25+ Year Zero-Coupon U.S. Treasury Index fund (ZROZ) the longest-duration Treasury ETF out there.

The ZROZ traded 831,000 shares on Thursday, or roughly 25 times its average daily-trading volume. The fund only had moved more than 25,000 shares six times since the start of March, and never close to Thursday’s activity.

“With that much trading volume, nothing makes sense besides someone having inside information about what [the Bureau of Labor Statistics] was going to say,” said Michael S. Falk of Focus Consulting Group in Chicago. “If you had wanted to make that bet and it was not inside information given to you at the last minute, you would have averaged into it to avoid disrupting the bid-ask spread. … While you could make the same bet in the options market, it is more likely for the authorities to look for it or find it there.”

Of course, no one will ever prove anything. Whoever is behind the trades could simply pass it off as making a bet on domestic rates after seeing yields fall in Germany on Thursday. It’s sufficiently plausible that people — most importantly, regulators — will probably just ignore the ZROZ activity as an unusual blip.

Meanwhile, Main Street investors go on with a general sense that they can’t trust Wall Street, even if they can’t prove that the game is rigged against them. Events like this are the reason why, no matter how much the investment bankers and brokerage firms swear nothing untoward is happening.

Added Falk: “With a bet of that size made a day before a news announcement, it certainly gives the feel that the system is being rigged and gerrymandered. The only reason it doesn’t panic the market is that the average person — and probably the average regulator — doesn’t even know that stuff like this is going on.”

— Chuck Jaffe

(Editor\’s note: This post has been corrected to reflect that the unusual trades occurred on Thursday.)

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